It appears that interest rates have peaked, at least for this part of the economic cycle. The U.S. Federal Reserve has softened its language around inflation and is now seemingly set to cut interest rates in an attempt to engineer a so-called soft landing in the economy. Not surprisingly, investors are looking at companies affected by changing interest rates. Many of these real estate stocks will win as interest rates fall.
However, it’s not all good news for the sector. In particular, these three real estate stocks to sell are in serious trouble in 2024.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) is a real estate investment trust, or REIT, focused on collateralized loan obligations (CLOs). CLOs are a type of debt security which consists of a pool of loans from different medium and large-sized commercial enterprises. The theory is that while the individual borrowers may be risky, making a basket of them reduces risk thanks to diversification.
CLOs, given their asset structure, tend to offer significantly higher interest rates than many other types of debt products. This has created an opportunity for REITs such as Arbor to specialize in these CLOs and offer investors outsized dividend yields.
ABR stock, for example, is offering a 12.4% dividend yield at the moment. But that yield may not be secure.
At the end of the day, CLOs are highly dependent on the state of the overall economy. By lending to riskier borrowers, it puts the lender in a challenging position during a recession. The Fed may be cutting rates, which is a positive, but it is doing so because the economy may be set to slow down dramatically. In fact, it seems that credit metrics for CLOs are already starting to worsen, and this could put Arbor’s dividend at risk.
Dream Finder Homes (DFH)
Dream Finder Homes (NYSE:DFH) is a smaller homebuilder that is relatively new among real estate stocks. DFH shares went public in 2021.
The company has enjoyed tremendous growth in recent years growing revenues from $522 million in 2018, to an estimated $3.5 billion for full-year 2023. This growth has been profitable as well, with shares trading for around 14 times forward earnings.
So, what’s the matter? Dream Finders has built its business around a unique idea, building homes in the Sunbelt. The company has prioritized new communities in sunny cities like Charlotte, Orlando, Raleigh, and various Texas locations. This worked like a charm during the pandemic as people left cramped urban apartments to buy their own place out in cheaper cities with better weather.
With the remote work trend slowing down and more and more companies returning to the office, though, this migration toward Sunbelt cities has lost some steam.
There’s a second factor here as well. According to a recent Wall Street Journal report, professional investors were a huge buyer of single-family homes in popular Sunbelt markets. But these investors are curtailing their investments amid falling prices and the unsettled interest rate environment. Long story short, Dream Finders was the perfect homebuilder for the remote work era, but it will likely fare much less impressively as people return to the office.
Offerpad Solutions (OPAD)
Offerpad Solutions (NYSE:OPAD) is a housing company focusing on real estate transactions. Specifically, it operates an iBuying platform which helps homeowners with buying, selling, renovating and otherwise engaging with residential properties.
In theory, Offerpad seemed like it could be a unique and valuable offering for consumers. However, the company has struggled to launch. It has run large and persistent operating losses. A fact that was particularly disturbing over the past few years when the housing market was booming.
Notably, other rivals like Zillow (NASDAQ:Z) have now exited the iBuying market. If big established real estate players couldn’t make this business model work, it will be a challenge for a small former SPAC like Offerpad to make this work.
Indeed, Offerpad is now in serious decline. The company’s revenues plunged 71% year-over-year last quarter. Offerpad is guiding to fewer than 800 homes sales next quarter, indicating a severe lack of operating scale. Given the firm’s weak balance sheet, it seems that a downturn in the housing market could be a fatal blow to Offerpad’s remaining business.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.